You are here

California Energy Woes Impact Housing Market

May 10, 2001

Article by Broderick Perkins

California's energy crisis and others that loom could short circuit the state's emerging buyers' markets and bring back what's been almost a decade of sticker shock.

If, however, things really get out of hand as they did with the culmination of the Loma Prieta quake of 1989, the energy crisis could plunge the state into a buyer's market that even buyers shun.

And so it goes in the Crisis State.

Just as California's booming economy was beginning to ease up and reflect what out-of-staters might consider the state's laid back nature, the energy shortage hit. A growing shortage of electric power and soaring energy costs could force California builders to postpone or kill some new housing projects, further exacerbating the existing housing availability and affordability crises.

"The ability of a builder or developer to supply electricity to a new subdivision or commercial project is becoming as important an issue as providing roads, water, schools and other infrastructure," said Stan Ross, Chairman of the University of Southern California's Lusk Center for Real Estate and former Vice Chairman of Ernst & Young Kenneth Leventhal Real Estate Group.

"The availability of electricity could be a deal breaker in some projects," he added.

That was largely the concern of senior real estate executives who met with business and political leaders to discuss economic, business, real estate and environmental issues at the center's two-day annual retreat.

The findings come on the heels of an emerging buyer's market in the San Francisco Bay Area (including San Francisco, San Jose and other major Northern California cities) where record-level inventories and dwindling demand have begun to push down prices for the first sustained period since the early 1990s.

Unfortunately, it's not just energy woes that can keep builders at bay. Along with supplying adequate power, building other elements of the state's infrastructure hasn't kept pace with the state's booming economic, population and business growth.

"Troublesome as it is, the state's energy shortage is only a part of a much larger issue -- California's steep decline in infrastructure spending," said Stuart Gabriel, the center's executive director.

Infrastructure spending has toppled from 20 percent of the state's gross domestic product in the 1960s to a paltry 2 percent today. That's hardly enough to build adequate sewer systems let alone an ample power grid.

"California currently ranks last among the 50 states in per-capita spending on infrastructure, yet the state is experiencing explosive population growth, with a projected increase of 15 million people -- the equivalent of Florida's current population -- over the next 20 years," Gabriel said.

Real estate investors are reluctant to set up shop if a given area doesn't supply it's own power. Some investors are interested in acquiring multi-family properties in Los Angeles partly because the city has its own utility and a surplus of power.

Real estate executives surveyed at the retreat also said the prospect of energy shortages and blackouts is among the most severe problems they face and suggested numerous solutions from a state takeover of California's power plants to energy conservation programs to a free market for the buying and selling of electricity.

Little mention was made of federal help. The Bush Administration is calling for conservation but only as a stop-gap measure until more power plants are constructed many years down the road.

And then there's that arid problem California faces several times a decade.

"We need to address our pressing infrastructure problems -- not only power but water -- if California is to maintain its economic competitiveness," Gabriel noted.